AXING WICKSELLS DURABILITY RESULT

Ian Steedman*
Manchester Metropolitan University, William Temple Foundation and
University of Chester
(August 2012; revised August 2012)
ABSTRACT
In the course of discussing kermans problem, Wicksell maintained that, when capitalists can choose
the length of life of a xed capital good, the chosen lifetime will be positively related to the real wage.
It is shown that this conclusion collapses once we drop Wicksells extreme assumption that the capital
good is made by unassisted labour.
1. INTRODUCTION
In his famous 1923 Mathematical Analysis of kermans Problem, Wicksell
(1934, pp. 27499) considered a xed capital model in which the length of life
of the durable means of production is variable and is chosen, on prot-
maximizing grounds, by entrepreneurs. His conclusion that the marginal
productivity of capital (p. 291) need not equal the rate of interest has been
much discussed and will not be referred to again here. We shall focus, rather,
on Wicksells claim that the chosen length of life of the xed capital good will
be positively related to the real wage rate (see pp. 279, 290 and 297). His
conclusion on this matter was, naturally, reached within the context of his
specic assumptions and was, we believe, logically valid (see below). Those
assumptions were decidedly extreme, however, and it is appropriate to
enquire whether Wicksells claim can stand when less extreme assumptions
are made. Anyone familiar with neo-Austrian models la Hicks (1973), let
alone with the von-Neumann model, will probably expect that Wicksells
* I thank Heinz Kurz, Arrigo Opocher, Manseop Park, Hillel Steiner, participants at the Fifth
International Conference of Applied Economics, Uppsala, June 2012 and two referees, for
helpful discussion of a previous version.
bs_bs_banner
Metroeconomica 64:1 (2013) 180185
doi: 10.1111/meca.12001
2012 Blackwell Publishing Ltd
durability result is not fully general; our aim here is not to justify those
expectations but simply to show just how small a change need be made to
Wicksells extreme assumptions in order for his conclusion to lose its validity.
2. WICKSELLS MODEL
Wicksell supposed that an amount of labour a . . . produces a capital-good,
e.g. an axe, which is instantly taken into employment. If used normally the
axe can remain in use for n years after which it is devoid of any value (p. 274).
The axe produces a nal good (Wicksell refers to saw-logs on p. 289) and
works with constant efciency. Wicksell employs a continuous time model
and stipulates, initially at least, that a = a
1
n
v
, with 0 < v < 1 (p. 276). He
deduces (p. 278) that nr is constant, where r is the instantaneous rate of
interest (p. 275), and hence that n is positively related to the real wage rate.
Later in the paper he maintains this same conclusion for a more general
a = f(n) relation.
3. EXTENDING WICKSELLS MODEL
We shall adopt here a period analysis rather than Wicksells continuous time
approach. This latter is not, however, what is extreme in Wicksells
assumptionsthat is to be found in his postulate that an axe, of whatever
durability, is made by unassisted labour, which either takes the axe-makers to
be magicians or presupposes the presence of free material inputs. As Swan
(1956) put it in the kermans problem section of his well-known paper, the
replacement cost [of an axe] consists of labour cost alone. If axes were
themselves made with the co-operation of capital, their replacement cost
would also contain an interest element. One simple way to introduce such an
interest elementthough not the only possible wayis to suppose that some
of the nal product is employed as circulating capital, along with labour, in
producing an axe. If a
n
units of labour and m
n
units of the nal good are used
to produce one axe that will last for n years then the price of such an axe, p
n
,
will be given by
wa r m p
n n n
+ + ( ) 1
(1)
where w is the ex post real wage rate, r is the period rate of interest and the
nal product is adopted as the numraire. We suppose that one axe, of
whatever durability, works each period with l units of labour to produce b
units of the nal good. Then
Axing Wicksells Durability Result 181
2012 Blackwell Publishing Ltd
wl p
r r
r
b
n
n
n
+
+
+

1
]
1

( )
( )
1
1 1
(2)
From (1) and (2),
w
b m
r r
r
l a
r r
r
n
n
n
n
n
n

+
+

1
]
1
+
+
+

1
]
1

,
+
( )
( )
( )
( )
( )
1
1 1
1
1 1
1

(3)
Before starting to question the robustness of Wicksells result, we may rst
conrm that result for the case he considered, namely m
n
= 0 for all n. In this
case, equating the wage rates yielded by, say, the n-period method of pro-
duction and the (n + 1)-period method leads easily to the conclusion that
there is a unique switching value r, that this value is positive iff
a a
n
n
a
n n n
< <
+
( )
+1
1
(4)
and that, as wrises, the switch is fromthe n-period method to the (n + 1)-period
method, as Wicksell said. (And relation (4) endorses Wicksells stipulation
(p. 276) that a
n
should increase, but less than proportionally, with n.)
Thus far we have simply reproduced Wicksells argument, albeit in period
rather than continuous time form. We now ask whether his durability result
can survive the simple extension to m
n
> 0. For this purpose it will sufce to
restrict our attention to an economy in which there are only two possibilities,
n = 1 or n = 2, and to replace (3) by
w
b m r
l a r
1
1
2
1
1
1

+ ( )
+ + ( )
(31)
and
w
b m
r
r
l a
r
r
2
2
3
2
2
1
2
1
2

+ ( )
+ ( )
+
+ ( )
+ ( )
(32)
where w
n
is the wage rate, for given r, when the n-period method is used.
Indeed we may simplify even further by supposing that (l/a
1
)
2
= (b/m), thus
182 Ian Steedman
2012 Blackwell Publishing Ltd
making (3
1
) a straight-line relationship. Setting (b = 25, m
1
= 16, l = 5 and
a
1
= 4) we reduce (3
1
) to
w r
1
5 4 1 + ( ) (51)
and (3
2
) to
w
r m r
r a r
2
2
3
2
2
25 2 1
5 2 1

+ ( ) + ( )
+ ( ) + + ( )
(52)
Clearly, the maximum wage and maximum interest rate for n = 1 are
W R
1 1
1 25 and %
4. THE CHOICE OF TECHNIQUE
From (5
1
) and (5
2
) it follows that w
1
= w
2
when (1 + r) = 0 and when
4 1 5 20 1 20 0
2 2
2
2
a m r a r ( ) + ( ) ( ) + ( ) +
(6)
We now consider three alternative economies, which differ only with respect
to (a
2
, m
2
).
4.1 Economy 1
With (a
2
= 10, m
2
= 29) we have W
2
= (21/20) > W
1
and R
2
24.65% < R
1
.
There is a single switchpoint at r 16.04%. As w increases from zero, the
switch is from n = 1 to n = 2 and thus Wicksells durability result holds good
in the presence of m
1
> 0 < m
2
. (Note though that a
1
< a
2
< 2a
1
does not hold
now.)
4.2 Economy 2
With (a
2
= 11, m
2
= 28.07) we have W
2
= (507/500) W
1
and R
2
25.18% > R
1
.
This does not mean that the n = 2 technique dominates the n = 1 technique,
however. In fact there are switchpoints at both r 11.11% and r 17.65%.
As the wage rises from zero, the choice of axe durability goes from n = 2 to
n = 1 and then back again to n = 2. Wicksells relation holds good at the high
wage switchpoint but not at the low wage switchpoint.
Axing Wicksells Durability Result 183
2012 Blackwell Publishing Ltd
4.3 Economy 3
With (a
2
= 13, m
2
= 28) we have W
2
= (22/23) < W
1
and R
2
26.45% > R
1
.
There is a single switchpoint at r 15.1%. As the wage rises from zero,
the one switch of technique is from n = 2 to n = 1 and Wicksells relation fails.
Thus while such a failure can arise from reswitching, as in Economy 2 above,
it can also occur in the absence of reswitching. Since Economy 3 embodies
only a smalland eminently reasonabledeparture fromWicksells assump-
tions, his conclusion that the durability of the axe is positively related
to the real wage certainly cannot be regarded as a robust conclusion.
5. GENERALIZATION
Returning now to (5
1
) and (5
2
), we may consider more generally which values
of (a
2
, m
2
) give rise to the types of case exemplied by Economies 1, 2 and 3.
Economy 1 is an example of the case (a
2
+ m
2
) < 40 and m
2
> 28.8; here
Wicksells result will always hold good. Economy 3 is an example of the case
(a
2
+ m
2
) > 40 and m
2
< 28.8; here Wicksells result will never hold good. As
might be expected, the case exemplied by Economy 2 is less straightforward
in its characterization. It is dened by 10.4 < a
2
< 12; (a
2
+ m
2
) < 40;
(5a
2
- 4)(20 - a
2
) < 16m
2
< 460.8: here there will always be reswitching as in
Economy 2. (To see why this case is thus characterized, consider when (6) has
a double root.)
The reader might wish to draw a diagram with, say, a
2
on the horizontal
axis and m
2
on the vertical one and to sketch the three regions just described.
(Note that a conventional isoquant, m
2
(a
2
), could be drawn to pass through
all three regions.) The region containing Economy 1 has an area of (4704/75);
that containing Economy 2 has an area of (8/75); and that containing
Economy 3 is unbounded. Suppose now, of both labour and the nal com-
modity, that they are not innitely divisible but, rather, that there is, for each
of them, a smallest relevant quantity. Using these quantities as our units of
measurement, all the a
2
and m
2
magnitudes that actually matter are integer
quantities and the number of these relevant (a
2
m
2
) pairs falling into each of
our three regions will be roughly proportional to the areas of these regions.
(For greater detail concerning this type of argument concerning indivisible
inputs, see Steedman, 2011.)
Returning now to (3) and comparing the w(r) frontiers for general n and
(n + 1), the reader will see at once that high degree polynomials in r can be
involvedand is welcome to study them.
184 Ian Steedman
2012 Blackwell Publishing Ltd
6. CONCLUDING REMARKS
Fixed capital theory is not easy and kerman and Wicksell are to be
honoured for their bold contributions. We so honour them, however, not by
merely repeating what they wrote but by trying to move on from their
achievementsand that may sometimes involve, as here, nding that we
have to leave some of their ndings behind. Even in a very simple modica-
tion of Wicksells axe model, and even when considering only axe-lives of
n = 1 and n = 2, we nd that it cannot be asserted that the durability of the axe
must be positively related to the real wage rate.
REFERENCES
Hicks, J. (1973): Capital and Time: A Neo-Austrian Theory, OUP, Oxford.
Steedman, I. (2011): Indivisible inputs and the probability of reswitching, in Salvadori, N.,
Gehrke, C. (eds): Keynes, Sraffa and the Criticism of Neoclassical Theory, Routledge,
London and New York.
Swan, T. (1956): Economic growth and capital accumulation, Economic Record, 32, pp. 343
61.
Wicksell, K. (1934): Lectures on Political Economy, vol. 1, Routledge and Kegan Paul, London.
Ian Steedman
Department of Economics
Manchester Metropolitan University
8 Fairfax Avenue
Manchester M20 6AJ
UK
E-mail: steedman7@tiscali.co.uk
Axing Wicksells Durability Result 185
2012 Blackwell Publishing Ltd